SPY Volume Study: Buying 20 Day Lows

For the kick-off post which covered buying SPY 20 day highs, go here…

I’m beginning to look at the influence of volume on price, starting with the SPY. I want to see what the influence is on the broader market before dialing it in to look at individual stocks.

Rules:

1. Buy SPY at the close when it makes a 20 day low OR
2. Buy SPY at the close when it makes a 20 day low with volume LESS than the 50 day average OR
3. Buy SPY at the close when it makes a 20 day low with volume MORE than the 50 day average.
4. Sell X days later at the close (up to 20 days later).

Results:

The reason buying 20 day lows with volume more than the 50 day average closely follows buying all 20 day lows (regardless of volume) is that most 20 day lows have come with volume greater than the 50 day average. This means that when a 20 day low is made, and volume is less than the 50 day average, it is a somewhat abnormal event.

Note that low volume doesn’t significantly affect returns until after the 6th day. It appears that when a 20 day low is made and there is some capitulation (with capitulation being volume running above average), the low is more likely to result in gains over the next 20 days. Conversely, new 20 day lows made on low volume have tended not to hold.

The question then is does this apply to individual stocks? If we are dip buying a new low, will we see better results if the low comes on higher than average volume? We’ll see…

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